How (Not) to Measure Competition

J. Boone; J.C. van Ours; H.P. van der Wiel

How (Not) to Measure Competition

J. Boone, J.C. van Ours, H.P. van der Wiel

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Abstract

We introduce a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.

Original language	English
Place of Publication	Tilburg
Publisher	TILEC
Number of pages	49
Volume	2007-014
Publication status	Published - 2007

Publication series

Name	TILEC Discussion Paper
Volume	2007-014

Keywords

competition
profit elasticity
measures of competition
concentration
price cost margin
profits

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2007-014

Market Design and Institutional Matters
Barendrecht, M. (Researcher), van Boom, W. H. (Researcher), Eijlander, P. (Researcher) & Manunza, E. (Researcher)
1/09/02 → …
Project: Research project

Cite this

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title = "How (Not) to Measure Competition",

abstract = "We introduce a new measure of competition: the elasticity of a firm{\textquoteright}s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.",

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TY - UNPB

T1 - How (Not) to Measure Competition

AU - Boone, J.

AU - van Ours, J.C.

AU - van der Wiel, H.P.

N1 - Pagination: 49

PY - 2007

Y1 - 2007

N2 - We introduce a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.

AB - We introduce a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.

KW - competition

KW - profit elasticity

KW - measures of competition

KW - concentration

KW - price cost margin

KW - profits

M3 - Discussion paper

VL - 2007-014

T3 - TILEC Discussion Paper

BT - How (Not) to Measure Competition

PB - TILEC

CY - Tilburg

ER -

How (Not) to Measure Competition

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Market Design and Institutional Matters

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